Dearth of independent directors in Sri Lanka- Theagarajah

The Sri Lanka Institute of Directors conducted the third module in its series of panel discussions on 'Contemporary Views on Corporate Stewardship and Boardroom Governance' recently.

Titled 'Effectiveness of the Nomination and Remuneration Committees' the panel was led by Hatton National Bank CEO and Managing Director Rajendra Theagarajah, and included Ceylon Chamber of Commerce Chairman Dr Anura Ekayanake, Chemanex Managing Director and CEO Preethi Jayawardena, Ernst and Young Country Manager and Partner Asite Talwatte, and Hayleys Director Rizvi Zaheed.

The panellists while discussing the various legislation and guidelines in the country that deal with formulating effective committees, also shared their own experiences and insights with regard to their respective organisations.

"The Nomination Committee is one of the most important committees of the Board," Jayawardena said. "If the right people are on the Board and in top management, then the company must progress.

The Board must be fearless, independent and must actively participate. Unfortunately, this does not happen, as often the Chairman or CEO will propose a person who will invariably be appointed. Such an appointee may not wish to go against the Chairman or CEO even when that decision may not be in the best interest of the company. A proper selection process is often absent.

In my experience only two or three people contribute to a discussion with the majority of members remaining silent. Active participation of the Board is of utmost importance.

The Nominations Committee is entrusted with the responsibility of ensuring that the right people are appointed and the correct decisions taken in the best interest of the company.

If there was proper selection, there would be independent, fearless, mature members who argue and debate, not for personal gain, but in the best interest of the Company.

Dr Ekanayake emphasised the importance of values and the past track record as well as having the technical and other expertise.

"Particularly at Board level it is important to pick people with right values who can contribute to long-term business sustainability.

The major corporate, market and economic collapses over the past 30 years, show a recurring picture of CEOs and Corporate Boards with men of questionable value systems who compromised the longer term interests of the company in favour of their own self-interest.

Enron was the most glaring example, but there are many others. In screening potential candidates for appointment to Boards, the individual's value systems, and their willingness to contribute courageously to debate and be truly independent in thought and speech is vital."

"There is a dearth of Independent Directors in Sri Lanka," Theagarajah observed. This is likely to be an acute problem in the future especially as we hope for more professionalism in the State sector.

He requested SLID to identify a pool of Independent Directors. Talwatte thought this a good idea to enable the process to be more structured and organized. Currently, it is the name one comes across first and that probably is a person one meets often, and not the most suitable.

The Remuneration Committee as the name implies deals with the remuneration of the Board members. Ideally consisting entirely of non-executives, its functions are to set the remuneration philosophy, strategy, policies and practices.

It must ensure that the CEO and other Executive Directors' packages are in line with these and if not so it needs to be set up and ensured that they are complied with. The remuneration of the non-executives, terms of employment, benefits also comes within its purview.

The Nominations Committee decides on selecting people, the Remuneration Committee lays down the procedures and the guidelines in order to decide on how we can retain these people.

"There is an assortment of legislation and guidelines in Sri Lanka which helps and assists Boards to formulate effective committees.

The guidelines are the Code on Best Practice developed jointly by the Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission in 2008, the Continuous Listing Rules released by the Colombo Stock Exchange in 2009, the Central Bank's mandatory requirements in Direction No. 2 of the Banking Act of 2007 which was amended subsequently by Amendment Nos. 5 and 8 in 2008.

These are the bare minimum and the presumption of Boards is to have these committees perform over and above that minimum."